How to Avoid One of the Biggest Mistakes Investors Make
I’ve been receiving a load of questions concerning the fact that stocks are rallying despite the US economy experiencing one of its sharpest, most severe collapses in history.
First and foremost, we need to dispel the myth that the stock market and the economy are closely related.
Case in point: Between 1972 and 1982, the US economy nearly tripled in size from $1.2 trillion to $3.2 trillion. And yet, throughout that entire period the stock market traded sideways for ZERO GAINS!
In contrast, from 1982 to 2000, the US economy again nearly tripled in size from $3.2 trillion to $10 trillion. But during this particular time, the stock market exploded higher rising nearly 1,500%!
So, we have two time periods in which the economy nearly tripled in size.
During one of them, the stock market went nowhere. During the other, the stock market rose nearly 1,500%.
Again, stocks have little if any correlation to the economy.
There are times when stocks will care a lot about the economy, but those time periods are usually short and due to an unexpected surprise – like the surprise of the economy being shut down to deal with the COVID-19 pandemic.
So, what do stocks care about?
Stocks Respond to Money Printing
Historically, whenever central banks start printing money at a rapid clip, stocks do well.
A great example of this is the time period from 2008 to 2016. The economy was weak at best and flatlining at worst. But because the Fed printed over $3.5 trillion during this time period, socks soared, rising over 100%.
Which brings us to today. Stocks are rallying hard yet again – despite the economy being extremely weak.
The reason for this is because of the TSUNAMI of liquidity that policymakers are throwing at the financial system.
Central banks alone have printed over $5 trillion in the last three months. Much of this money has found its way into the stock market.
On top of this, G-10 governments have implemented fiscal stimulus programs ranging from 5% (Norway) to over 35% of (Germany and Italy) of their historic revenue and spending budgets!
Put another way, trillions upon trillions of world currencies have been printed and funneled into the financial system. This is sending stocks through the roof. And unless we get another nasty economic shock to the downside, this trend will likely continue.
Editor, Money & Crisis